Survey says more sophisticated anti-fraud technology is in insurers' future

By Dennis Jay, Director of the Coalition Against Insurance Fraud

The Coalition Against Insurance Fraud (CAIF) recently surveyed 42 insurers on fraud and technological efforts to fight it. The survey, The State of Insurance Fraud Technology, is a follow-up to a 2012 survey.

Detecting claims fraud is still the chief way insurers deploy technology in the fight against fraud. But our recent survey suggests that insurers are becoming savvy to the other types of fraud and the ways technology can halt it. They are interested – if not yet ready – to use technology to fight problems like cyber fraud and rate evasion.

Like most any industry, fraud plays a grim role in chipping away at the bottom line. Research suggests that 10 percent of the billions paid out in claims each year goes to a fraudster. Internal, rate evasion and underwriting fraud impact 10 percent of revenue in those areas or overall. And now insurers have an additional threat: Cyber fraud. While the data breach at the retailer Target claimed the headlines last December, Nationwide Insurance experienced a cyber-fraud attack just two months earlier. In addition, more than half of insurers indicated that the amount of suspicious activity had increased in the past three years.

How are insurers using technology to fight fraud? In multiple ways with increased sophistication and interest in more analytical options. Here are some of the highlights from our survey:

Hardly anyone is trying to fight fraud without technology: 95 percent of respondents said that they currently are employing anti-fraud technology, an increase from 88 percent in 2012.

IT resources are still a constraint: The majority of insurers (53 percent) cited lack of IT resources as biggest challenge in implementing anti-fraud technology.

Spending on anti-fraud technology is likely to increase: 85 percent of insurers expect funding for anti-fraud technology to increase or remain the same. Link analysis, predictive modeling and text mining are the top three areas for investment.

In-house fraud technology development is becoming a thing of the past: Insurers have told us IT resources are scarce, so it would make sense that homegrown solutions are going by the wayside. Two-thirds of insurers now use a fraud detecting system built (or supplied) by a vendor, up from 49 percent in 2012.

A key takeaway from this survey is that no one technology is sufficient to fight fraud. The effort requires a combination of techniques to identify both opportunistic and organized fraud. The traditional first line of defense, automated flagging/business rules, is used by 81 percent of respondents. But respondents understand that flagging has its limits. This blunt approach sends out a lot of time-consuming false positives – a factor noted by 17 percent of respondents. Since 2012 a small number of insurers have added data visualization, geographic data mapping, text mining, exception report/anomaly detection and predictive modeling to their fraud detection toolkit.

What might be more interesting is the growth in interest in using these technologies sometime in the next 12 to 24 months. Link analysis, in particular, has piqued insurers’ interest. In 2012, only 19 percent of insurers expressed an interest in using this technology that has been shown to work at fighting organized crime. This year, 45 percent say they want to add this option. That’s interesting as the technology is already being deployed by slightly less than half our respondents.

What’s next?

We think cyber fraud will be a major area of interest for insurers going forward. We did not survey on the topic of cyber fraud in 2012, but this year 14 percent of insurers said they were currently employing technology to prevent cyber fraud. We expect that number to rise significantly in next few years. In addition, we see more buy-in from executives toward the role of robust technology. In much higher numbers, insurance executives report that technology is helping improve investigator efficiency, increase mitigation of losses and provide more referrals.

This could be a result of an increase in the solutions that have the ability to learn from an insurer’s experience to get even better at detecting fraud. As we note in our report, the more intelligent the tools, the better the chance of detecting fraud in the early stages and predicting potential areas of fraud before the criminals have exploited that area.